2016 (12) TMI 1144 - AT - Income Tax

Penalty u/s. 271AAA - commission income on accommodation bills - Held that - The assessee has made truthful declaration while recording the statement u/s 132(4) of the Act whereby the assessee claimed that he earned commission income @0.75% of the accommodation bills provided by the assessee and also explained the manner in which the said commission income on accommodation bills is derived , while it is a different matter that at later stage while recording statement u/s 131 of the Act in 19/03/2013, the assessee is not able to produce the brokers to whom commission expenditure @ 2.25% was paid during the course of assessment proceedings in 2013 to prove such payments out of books due to obious reasons cited by us as set out above and the assessee was left with no choice but to surrender additional 2.5% to buy peace and to avoid protracted litigation with the Revenue but the fact remains that the assessee earned 0.75% net commission income on accommodation bills provided by the assessee, while it is a different matter that the assessee declared net commission income 0.75% of the accommodation bills provided by the assessee, after claiming expenditure of 2.5% towards brokerage payable by the assessee to brokers which was ultimately surrendered by the assessee during assessment proceedings as these brokers were not traceable due to sales tax raid on them and the assessee was unable to prove brokerage expenditure incurred by him due to reasons set out above. Thus, based on our above detailed discussions and reasoning as set out above , in our considered view, the penalty is not leviable in the instant case u/s 271AAA of the Act as the assessee is entitled for immunity from penalty u/s 271AAA(2) of the Act and the penalty levied by the AO and as sustained by learned CIT(A) u/s 271AAA of the Act is hereby ordered to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legitimacy of penalty under Section 271AAA of the Income-tax Act, 1961.
2. Manner of earning and substantiating undisclosed income.
3. Immunity from penalty under Section 271AAA(2).

Issue-wise Detailed Analysis:

1. Legitimacy of Penalty under Section 271AAA:
The primary issue was whether the penalty of ?63,611 levied under Section 271AAA of the Income-tax Act, 1961, was justified. The assessee was subjected to a search operation on 29th March 2011, during which he admitted to providing bogus bills amounting to ?2,54,44,602 to the Kanakia Group and earning commission income of 0.75% on these bills as undisclosed income. During the assessment proceedings, the assessee revised his undisclosed income to 2.5% of the value of the accommodation bills, amounting to ?6,36,116, and included this in his return of income filed on 19th March 2013. The Assessing Officer (AO) initiated penalty proceedings under Section 271AAA, observing that the assessee failed to substantiate the manner of earning this undisclosed income and thus did not qualify for immunity under Section 271AAA(2).

2. Manner of Earning and Substantiating Undisclosed Income:
The AO's contention was that the assessee needed to explain and substantiate the manner of earning the undisclosed income to claim immunity from penalty. The assessee initially admitted to earning 0.75% commission on accommodation bills during the search but later revised it to 2.5% during the assessment proceedings. The AO argued that the assessee failed to prove the payment of 2.5% commission to brokers and thus did not substantiate the manner of earning the undisclosed income. The assessee, however, explained that the increased commission rate was admitted to "buy peace and avoid protracted litigation." The assessee also detailed the modus operandi of earning commission income through bogus bills, involving transactions with brokers and the Kanakia Group.

3. Immunity from Penalty under Section 271AAA(2):
The Tribunal examined whether the assessee met the conditions for immunity from penalty under Section 271AAA(2), which requires the assessee to (i) admit the undisclosed income, (ii) specify the manner in which it was earned, and (iii) substantiate the manner of earning. The Tribunal found that the assessee had disclosed the undisclosed income at the time of the search and explained the manner of earning it through accommodation bills. The inability to produce brokers to substantiate the payment of 2.5% commission was attributed to the brokers' reluctance to self-incriminate due to ongoing sales tax actions against them. The Tribunal concluded that the assessee had made a truthful declaration and fulfilled the conditions for immunity from penalty.

Conclusion:
The Tribunal held that the penalty under Section 271AAA was not leviable as the assessee was entitled to immunity under Section 271AAA(2). The assessee had disclosed the undisclosed income, explained the manner of earning it, and made a bona fide effort to substantiate it. The penalty levied by the AO and sustained by the Commissioner of Income Tax (Appeals) was ordered to be deleted. The appeal filed by the assessee was allowed, and the order was pronounced on 15th October 2016.